Block, Inc. (filing registrant: Square, Inc.) — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. The filing reports annual results, with quarterly data including the three months ended December 31, 2017. Square described a commerce ecosystem spanning payment processing, seller software and hardware, Cash App, Caviar, and Square Capital.
Key financial and operating metrics
| Metric | FY2017 | FY2016 | Change or context |
|---|---|---|---|
| Total net revenue | $2,214.3 million | $1,708.7 million | Up 30% |
| Gross profit / gross margin | $839.3 million / 37.9% | $576.0 million / 33.7% | Margin improved about 4.2 percentage points |
| Operating loss | $(54.2) million | $(170.5) million | Operating margin improved from approximately (10.0)% to (2.4)% |
| Net loss | $(62.8) million | $(171.6) million | Loss narrowed; diluted loss per share was $(0.17), versus $(0.50) |
| Adjusted EBITDA (non-GAAP) | $139.0 million | $44.9 million | Improved; excludes specified items, including share-based compensation |
| Adjusted Revenue (non-GAAP) | $984.0 million | $686.6 million | Up 43%; net revenue less transaction costs and Starbucks activity |
| Gross Payment Volume (GPV) | $65.3 billion | $49.7 billion | Up 32%; larger sellers generated 48% of Q4 GPV, versus 43% |
| Cash from operating activities | $127.7 million | $23.1 million | Improved; working-capital timing materially affected cash flows |
Transaction-based revenue was $1,920.2 million, up 32%. Subscription and services revenue increased 95% to $252.7 million, chiefly from Instant Deposit, Caviar, and Square Capital. Hardware revenue declined 7% to $41.4 million. Q4 2017 revenue was $616.0 million and net loss was $15.7 million.
FY2017 investing cash outflow was $340.6 million, including substantial purchases of marketable securities and a $25.0 million strategic investment; financing cash inflow was $454.9 million. At year-end, cash and cash equivalents were $696.5 million, marketable securities totaled $373.2 million, and management reported $1.108 billion in cash, cash equivalents, restricted cash, and marketable securities. Working capital was $805.5 million. A $375 million revolving credit facility remained undrawn and available.
Debt included $440 million principal of 0.375% convertible notes due 2022, with a $358.6 million balance-sheet carrying value at year-end. The notes’ disclosed fair value was $719.4 million. The company also reported $106.9 million of operating lease commitments and $20.4 million of purchase commitments.
Material changes versus the prior comparable period
- Revenue growth continued, though GPV growth moderated to 32% from 39% in 2016. Adjusted Revenue grew faster than reported revenue, reflecting the company’s stated measure excluding transaction costs and Starbucks activity.
- Starbucks completed its transition to another provider in Q4 2016; Square reported no Starbucks transaction revenue in 2017.
- Gross margin improved as transaction costs grew more slowly than transaction-based revenue, aided by a more favorable mix of online and other higher-margin payments and improvements in transaction costs.
- Operating cash flow rose to $127.7 million from $23.1 million, but the year-end balance reflected payment-settlement timing and substantial movements in settlements receivable and customer payables.
- Square issued $440 million of convertible notes in March 2017. The company also paid $54.8 million to cancel Starbucks warrants.
- FY2016 included a $48 million Robert E. Morley litigation settlement expense; there was no comparable expense in FY2017.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific numerical revenue, profit, or GPV guidance. Management expected liquidity to cover working capital and planned capital expenditures for at least 12 months, and anticipated continued investment in product development, sales and marketing, and growth. It expected certain operating expenses to decline as a share of revenue over time, while noting near-term variability.
- Profitability and investment: Square remained GAAP loss-making, with an accumulated deficit of $842.7 million, and stated that it intended to continue substantial investment. Share-based compensation was $155.8 million in 2017, a significant recurring expense.
- Credit and transaction risks: Transaction, loan, and advance losses rose 31% to $67.0 million. The company recorded an $8.0 million charge for loan losses; its loans are generally unsecured, and Square Capital depends substantially on third-party investors purchasing originated loans.
- Other unusual items: Hardware inventory reserves, revaluations, and write-offs were $4.9 million, including a $2.3 million charge related to a distributor’s bankruptcy. Bitcoin activity added to Cash App in Q4 was immaterial to 2017 financial statements.
- Contingencies and regulation: A San Francisco tax authority challenged Square’s classification of its business activities. The initial demand was described as immaterial, but subsequent-year taxes, penalties, and interest could be material; the company could not estimate a loss range. Caviar courier misclassification suits were globally settled and dismissed with prejudice in January 2018; the filing does not state a settlement amount.
- Principal risks: Dependence on card networks, acquiring processors, and financial partners; fraud, chargebacks, cybersecurity and service interruptions; regulatory uncertainty in payments, lending, privacy, and cryptocurrency; competition and pricing pressure; and reliance on third-party hardware suppliers. The filing also notes seasonality, especially stronger payment volume in the fourth quarter.
Important facts for investors to verify
- Reconcile GAAP revenue and losses with Adjusted Revenue, Adjusted EBITDA, and adjusted earnings; review the exclusions and limitations of these non-GAAP measures.
- Assess whether stronger GPV and subscription/services growth can sustain margins and support GAAP profitability, particularly given ongoing operating investment and share-based compensation.
- Examine operating cash flow excluding settlement-related working-capital timing, and distinguish corporate liquidity from customer funds and settlement balances.
- Review the convertible notes’ conversion, cash-settlement, dilution, and maturity terms, alongside the notes’ reported carrying value and fair value.
- Track Square Capital loan performance, loss provisions, third-party loan funding, and the potential effect of a downturn in seller activity.
- Monitor the San Francisco tax dispute, regulatory developments, and the outcome and financial terms of the Caviar settlement.